With oil down more than 6% on Tuesday, the commodity’s three-day rally could prove to be just that: No more than a small rally in the midst of a prolonged bear market.
Oil’s surge provided some much needed relief to various single-country and sector exchange traded funds, but the pop has emboldened some market participants to reiterate bearish views on the commodity and those views are proving accurate Tuesday.
“At best, we think this is sideways [movement]with risk to the downside,” Ari Wald of Oppenheimer said on CNBC Monday. Wald notes the Energy Select Sector SPDR (NYSEArca: XLE) violated a long-term uptrend with its 2015 decline.
Meanwhile, in the lower oil prices are pressuring exploration and production stocks as the drillers’ value is based on production and assets already sunk into projects. [Energy ETF Investors Grow Wary of Oil Outlook]
Additionally, these energy companies require a lot of capital to keep drilling, and since depletion rates on wells are high, the companies will require cheap capital to keep operations running.